September 23, 2008

Hungarian Commentary Regrets Too Much Emphasis on Energy Pipeline Disputes

Text of report by Hungarian privately-owned liberal newspaper Nepszabadsag website, on 20 September

[Commentary by Andras Gyorgy Deak: "Notes on Energy Policy in Connection With Foreign Affairs Dispute"]

Following the war between Georgia and Russia, Hungarian foreign policy has again started to "chew over" the issue of the Nabucco and South Stream pipelines. It seems it is hard to find any event in eastern Europe that does not raise this issue among our foreign affairs politicians and experts. Hungarian foreign policy has become "enriched" with yet another obsession.

The Russian-Georgian war has not really changed much on this issue and the disputes about loyalty to the pipeline have little to do with Hungary's actual energy policy.

During the Russian-Georgian war, the two important, major pipelines - the Baku-Ceyhan oil pipeline and Baku-Erzurum gas pipeline - crossing Georgia did not suffer any damage. That is a significant point to consider, because bombing a compressor station would not be too sophisticated an operation and it could have substantially cut the pumping capacity or even shut down the exports completely. Despite all this, the Russians honoured the West's major interest in Georgia. This means that the cup is half full and half empty. The route is safe and has come to no harm. But there could have been an opportunity and who knows what will happen next over there? It should be pointed out that both the Americans and Russians have opted for the first interpretation. The official rhetoric from Washington is desperate to prove that there is no direct effect of the war on energy policy and that the Georgian transit route is safe. The Russians are most likely smirking and dissembling. But in eastern Europe the "Russian gas nightmare" has emerged again and we can safely predict that the energy consequences will be much more striking.

For now, only one of those consequences seems to be really significant. Namely, the US-Russian relationship has become frozen, presumably for quite a while, and at the same time potential post- Soviet exporters do not wish to choose between Moscow and Washington. If they had to choose anyway, they would rather trust the existing, familiar Russian connection over the new and risky US one. It was no coincidence that the region's last pipeline to bypass Russia was established at the dawn of the Moscow-Washington relationship in 2005. Nor was it an accident that Ilham Aliyev just slammed the door on Dick Cheney, who was visiting him after the Georgian war - one would not do such a thing to a vice president, even one about to leave office. Taking all the above into consideration, the situation has become even worse, although it had not been too rosy before, either.

Failure of the Azerbaijan project is rather inconvenient because - despite any contrary public belief - it would be quite easy to produce a sufficient volume of natural gas at the input end of the Nabucco pipeline. There is the intention to build the pipeline for a gas demand of at least 8-10 billion cubic meters. And if the machines are already out there in the fields for the work, only 20 per cent additional costs would be incurred to build a pipeline with three times the capacity. Besides, for our part, the focus should be placed above all on building the pipeline rather than on its capacity. The volume, in the first case, could be produced by Baku on its own, with just a modest effort. However, that option has recently receded into the distance.

At the same time Nabucco is being mostly challenged by the Turkish route. Gas consumption in Turkey has seen a steady increase and may rise further from today's 35 billion cubic meters to some 55 billion. Most of that volume is exported from Russia. So Turkey can only be seen as being ready to play the role of an importer rather than a transit country. Moreover, Ankara does not want to harm its relations with Moscow. This means that the key to the whole situation remains with the Turks and the Russian-Georgian war has not changed this. However, no one has yet heard a word about Turkey's role in any of the disputes held about Nabucco here in Hungary.

Overall, Nabucco's chances have become slightly worse, while the ambivalence concerning South Stream remains fairly strong. The question is whether Hungarian diplomacy should really be dealing with the issues so intensively and if the projects can be promoted in any way. It is worth mentioning that the discussions over the two pipelines are hardly related to energy policy. The projects are uncertain, they seem to be in the distant future, and we have hardly any say in the matter, so that no one can put any kind of badge on his coat. But the point is that we did start arguing with one another just because two superpowers, together with a loquacious European Union, happened to draw a few lines on our map. From a political point of view, we are now considered to be unpredictable and unsafe and those characteristics are surely no help in building pipelines.

Besides, we should think over how to promote the plans. One thing is sure: It is a disadvantage that Hungary's high-pressure gas market is still unprofitable, whereas our two major parties keep bidding against each other to promise cheap gas to the Hungarian public. The Gyurcsany government has just recently "cancelled" its debts to E.ON, and Fidesz[-Hungarian Civic Alliance] has been unable to give up the practice of producing repeated populist hysteria about gas price increases. At the same time, we expect companies to have pipelines in this country and do good business pumping gas for us. But nobody in Hungary seems to be striving to set up a reliable and profitable gas market system in this country. Under the circumstances, I would not be surprised if the gas companies, even after the eventual accomplishment of the LNG terminal in Croatia, decided not to provide us with any gas. Our foreign affairs discussions on this are just wild talk much more about our relationships with the Russians than our real interests.

It would be worth considering what we can do if none of these pipeline projects is accomplished or if they are greatly protracted. That seems highly probable and we must prepare for such a situation; in any case, such caution will do no harm to the chances of either Nabucco or South Stream. Thank God that rocketing world market prices can compensate us somewhat for our dependency on gas, even if that is to be maintained by Hungarian policy as long as possible. Nevertheless, our two major parties have not yet put anything on the table to make wasteful state subsidies of renewable resources or the energy market more transparent. That attitude can be understood about the government, as it has many beneficiaries in its circle. But it is too much for us to understand why the Hungarian opposition, constantly citing the Russians' energy weapons, is assisting with this issue and giving a helping hand. The point is that a larger regional market could be developed and energy efficiency improved by economies of scale and the best possible solutions for the network. Political support is, of course, required. But official Hungarian foreign policy finds the issue too small to deal with and the opposition, always keen to pose as true Hungarians, probably lacks confidence in this sphere. Anyway, let the whole thing be resolved by the "trade" alone. But regulation policy is decided on by parliamentary deputies, price increases by the minister in charge, and the MVM [Hungarian Energy Company] is owned by the state. The rest can certainly be arranged by the "trade." So we are left with our dispute on the gas pipelines. A promise of a victory in the distant future, without bringing tears tomorrow.

There may be a happy ending. Gas might be found in the village of Mako, or peace suddenly comes about between the West and Russia, or a super-cheap energy technology is invented. We can, of course, hope for the energy awareness of the Hungarian people or the US cavalry bringing us Nabucco, which our Azeri friends will fill with inexpensive gas. People are keen on political fiction. In reality, however, all the consequences are obviously known. They are bad. They are the worst possible ones under the current circumstances, because of our energy policy and sharply polarized politics. We can further count on the single pipeline dependency on the gas market, an increase in dependency in the electricity market, a serious loss of development in the segmented energy market, and some wasted billions of forints on social and energy subsidies. At the same time, the Russians seem to be in a fairly consolidated situation. Our dependency will only increase. Unless the unbelievable scenario comes about that the Russians make a blunder (which may actually happen, but we will not come out well), or we have a massive amount of luck in the field of global policy or energy prices. One can, of course, make witty remarks about Gazprom barracks or find a KGB finger in every pie and then grin and bear it. But if I myself were tasked by the Kremlin's fancy witches' kitchen to mess up eastern Europe, I would waste no time and energy on Hungary, as the Hungarians are quite able to do that by settling their own affairs and damaging themselves. They have been quite busy with that over the last 20 years. And they have not even needed Nabucco or South Stream.

Originally published by Nepszabadsag website, Budapest, in Hungarian 20 Sep 08.

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